Much like a possum, the American expansion this spring is playing dead in a variety of ways.
Real GDP growth was barely positive in the first quarter and this number is likely to be revised into negative territory this week.
Retail sales have fallen in four of the past five months and were lower in April than they were last August. Industrial production has also been sagging, with output declining for five consecutive months for the first time since 2009.
However, just as in the case of the possum, the economy is only pretending to be dead.
The weakness in real GDP was exacerbated by bad weather in the east, a dockworkers’ strike in the west, and some suspicious seasonal adjustment of government spending numbers.
But excluding sales by petrol stations (which have been pummelled by falling prices) nominal sales are actually up by 1.7 per cent since last August. The industrial production numbers have also been suppressed by falling utility spending (as the weather improved) and lower oil exploration.
The decline in manufacturing production, while clearly disappointing, has only been half as severe as the fall in overall industrial production so far this year.
If there was significant strength elsewhere in the economy, these special factors wouldn’t have dominated the data. While the economy is not dead, it isn’t particularly lively.
That said, GDP growth in the second quarter still looks likely to be roughly 2-3 per cent annualised, even though growth in the first quarter will probably be revised down.
Positive GDP growth in the second quarter won’t be announced in time for the June meeting of the Federal Reserve and current economic gloom will prevent any lift off in rates until July at the earliest.
What is more likely is the beginning of monetary tightening by the Fed in September, if the economy is now reviving following an extended hibernation.
We believe the US economy and, to some extent, the global economy will see faster growth for the rest of the year.
An important issue for investors, particularly with regard to the US, is whether the pace of growth is enough to both meet the Fed’s criteria of tightening labour markets and slowly rising inflation, while enabling corporate earnings to resume an upward climb as the dollar and oil drags fade. We think it is.
Finally, for investors, it is important to look at valuations, which continue to look reasonable for equity markets in a low-inflation, low-interest rate environment, although it also continues to look expensive in fixed income markets.
It is this valuation issue, more than economic numbers, which probably lies behind the recent sell-off in global bond markets and which still suggests an overweight to stocks relative to bonds despite an economy, which to this point, has been playing dead.